##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission file number: 0-22187
 RENAISSANCE LEARNING, INC.
  Wisconsin
    
    39-1559474(State or other
    
    (I.R.S. Employerjurisdiction of incorporation)
    
    Identification No.)
 2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
 54495-8036
 (715) 424-3636
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at
October 31, 2008Common Stock, $0.01 par value
    
    29,172,587




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##### 



RENAISSANCE LEARNING, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
  
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2008 and
December 31, 2007
    
    
    1Condensed Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    7Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    12Item 4. Controls and Procedures
    
    
    13PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    
    13Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    13Item 6. Exhibits
    
    
    14Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007(In Thousands, Except Share and PerShare Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,939
    
    
    $
    7,337Investment securities
    
    
    5,767
    
    
    
    8,136Accounts receivable, less allowance of $1,100
    
    
    16,547
    
    
    
    8,791Inventories
    
    
    5,646
    
    
    
    6,273Prepaid expenses
    
    
    2,402
    
    
    
    2,197Income taxes receivable
    
    
    2,853
    
    
    
    1,450Deferred tax asset
    
    
    4,405
    
    
    
    4,406Other current assets
    
    
    171
    
    
    
    300Total current assets
    
    
    61,730
    
    
    
    38,890Investment securities
    
    
    5,197
    
    
    
    8,982Property, plant and equipment, net
    
    
    9,134
    
    
    
    10,578Deferred tax asset
    
    
    1,460
    
    
    
    1,587Goodwill
    
    
    47,233
    
    
    
    47,065Other intangibles, net
    
    
    5,230
    
    
    
    5,579Capitalized software, net
    
    
    229
    
    
    
    452Other non-current assets
    
    
    174
    
    
    
    167Total assets
    
    $
    130,387
    
    
    $
    113,300LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,184
    
    
    $
    2,011Deferred revenue
    
    
    48,567
    
    
    
    35,675Payroll and employee benefits
    
    
    4,701
    
    
    
    4,184Other current liabilities
    
    
    4,306
    
    
    
    3,563Total current liabilities
    
    
    59,758
    
    
    
    45,433Deferred revenue
    
    
    2,935
    
    
    
    2,707Deferred compensation and other employee benefits
    
    
    1,501
    
    
    
    1,933Income taxes payable
    
    
    4,614
    
    
    
    5,104Other noncurrent liabilities
    
    
    199
    
    
    
    136Total liabilities
    
    
    69,007
    
    
    
    55,313Shareholders equity:Common stock, $.01 par value; shares authorized: 150,000,000;
issued: 34,736,647 shares at September 30, 2008 and December 31, 2007
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    52,074
    
    
    
    52,683Retained earnings
    
    
    105,314
    
    
    
    102,887Treasury stock, at cost: 5,601,490 shares at September 30, 2008;
5,703,450 shares at December 31, 2007
    
    
    (96,325
    )
    
    
    (98,123
    )Accumulated other comprehensive income
    
    
    (30
    )
    
    
    193Total shareholders equity
    
    
    61,380
    
    
    
    57,987Total liabilities and shareholders equity
    
    $
    130,387
    
    
    $
    113,300
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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME 

(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    19,439
    
    
    $
    18,674
    
    
    $
    63,532
    
    
    $
    62,581Services
    
    
    8,761
    
    
    
    7,135
    
    
    
    22,100
    
    
    
    17,093Total net sales
    
    
    28,200
    
    
    
    25,809
    
    
    
    85,632
    
    
    
    79,674Cost of sales:Products
    
    
    3,176
    
    
    
    3,539
    
    
    
    11,175
    
    
    
    11,732Services
    
    
    3,664
    
    
    
    3,301
    
    
    
    9,993
    
    
    
    8,612Total cost of sales
    
    
    6,840
    
    
    
    6,840
    
    
    
    21,168
    
    
    
    20,344Gross profit
    
    
    21,360
    
    
    
    18,969
    
    
    
    64,464
    
    
    
    59,330Operating expenses:Product development
    
    
    4,521
    
    
    
    4,410
    
    
    
    12,822
    
    
    
    14,111Selling and marketing
    
    
    8,953
    
    
    
    8,852
    
    
    
    27,230
    
    
    
    27,093General and administrative
    
    
    4,226
    
    
    
    3,809
    
    
    
    11,783
    
    
    
    11,263Total operating expenses
    
    
    17,700
    
    
    
    17,071
    
    
    
    51,835
    
    
    
    52,467Operating income
    
    
    3,660
    
    
    
    1,898
    
    
    
    12,629
    
    
    
    6,863Other income, net
    
    
    275
    
    
    
    290
    
    
    
    616
    
    
    
    916Income before taxes
    
    
    3,935
    
    
    
    2,188
    
    
    
    13,245
    
    
    
    7,779Income taxes
    
    
    1,365
    
    
    
    821
    
    
    
    4,722
    
    
    
    2,917Net income
    
    $
    2,570
    
    
    $
    1,367
    
    
    $
    8,523
    
    
    $
    4,862Earnings per share:Basic
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.30
    
    
    $
    0.17Diluted
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.30
    
    
    $
    0.17Cash dividends declared per share
    
    $
    0.07
    
    
    $
    0.82
    
    
    $
    0.21
    
    
    $
    0.92
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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 For the Nine Months EndedSeptember 30,2008
    
    
    2007(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    8,523
    
    
    $
    4,862Adjustments to arrive at cash provided by operating activities:Depreciation and amortization
    
    
    2,861
    
    
    
    2,874Amortization of investment discounts/premiums
    
    
    84
    
    
    
    59Share-based compensation expense
    
    
    1,053
    
    
    
    902Deferred income taxes
    
    
    127
    
    
    
    (1,172
    )Excess tax benefits from share based payment arrangements
    
    
    (36
    )
    
    
    Change in assets and liabilities, excluding the effects of
acquisitions and divestitures:Accounts receivable
    
    
    (7,757
    )
    
    
    (5,171
    )Inventories
    
    
    627
    
    
    
    (1,559
    )Prepaid expenses
    
    
    (205
    )
    
    
    (185
    )Income taxes
    
    
    (1,858
    )
    
    
    2,941Accounts payable and other liabilities
    
    
    1,497
    
    
    
    (251
    )Deferred revenue
    
    
    13,119
    
    
    
    13,906Other
    
    
    (304
    )
    
    
    191Net cash provided by operating activities
    
    
    17,731
    
    
    
    17,397Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (914
    )
    
    
    (1,993
    )Purchase of investment securities
    
    
    
    
    
    
    (21,129
    )Maturities/sales of investment securities
    
    
    5,680
    
    
    
    33,746Capitalized software development costs
    
    
    (143
    )
    
    
    (167
    )Net proceeds from sale of property
    
    
    113
    
    
    
    567Net cash provided by investing activities
    
    
    4,736
    
    
    
    11,024Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    348
    
    
    
    30Excess tax benefits from share based payment arrangements
    
    
    36
    
    
    
    Dividends paid
    
    
    (6,096
    )
    
    
    (26,670
    )Purchase of treasury stock
    
    
    (153
    )
    
    
    (1,433
    )Net cash used by financing activities
    
    
    (5,865
    )
    
    
    (28,073
    )Net increase in cash and cash equivalents
    
    
    16,602
    
    
    
    348Cash and cash equivalents, beginning of period
    
    
    7,337
    
    
    
    5,953Cash and cash equivalents, end of period
    
    $
    23,939
    
    
    $
    6,301
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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)
 1. Consolidation
  2. Basis of Presentation
  3. Earnings Per Common Share
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic weighted average shares outstanding
    
    
    28,753,253
    
    
    
    28,750,945
    
    
    
    28,761,784
    
    
    
    28,806,086Dilutive effect of outstanding stock options
    
    
    2,461
    
    
    
    1,169
    
    
    
    3,166
    
    
    
    2,523Dilutive effect of restricted shares
    
    
    65,458
    
    
    
    25,241
    
    
    
    77,879
    
    
    
    25,241Diluted weighted average shares outstanding
    
    
    28,821,172
    
    
    
    28,777,355
    
    
    
    28,842,829
    
    
    
    28,833,850
  4. Comprehensive Income
  5. Goodwill and Other Intangible Assets
   - 4 -




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September 30, 2008
    
    
    December 31, 2007Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net(In Thousands)Tradename
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000
    
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000Customer relationships
    
    
    4,150
    
    
    
    1,920
    
    
    
    2,230
    
    
    
    4,150
    
    
    
    1,571
    
    
    
    2,579$
    7,150
    
    
    $
    1,920
    
    
    $
    5,230
    
    
    $
    7,150
    
    
    $
    1,571
    
    
    $
    5,579
 6. Recent Accounting Pronouncements
 Fair Value Measurements
 Business Combinations
 Determination of the Useful
Life of Intangible Assets Goodwill and Other Intangible Assets Business Combinations
 7. Share Based Compensation
    - 5 -




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Weighted Average
    
    
    AggregateShares
    
    
    Value Per Share
    
    
    Intrinsic Value(In Thousands, Except Per Share Amounts)Balance at January 1, 2008
    
    
    250
    
    
    $
    14.16
    
    
    $
    3,498Granted
    
    
    93
    
    
    
    13.06Vested
    
    
    (57
    )
    
    
    13.25Balance at September 30, 2008
    
    
    286
    
    
    $
    13.98
    
    
    $
    3,720
  8. Dividends
  9. Subsequent Event
   - 6 -




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Results of Operations
       - 7 -




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net Sales:Products
    
    
    68.9
    %
    
    
    72.4
    %
    
    
    74.2
    %
    
    
    78.5
    %Services
    
    
    31.1
    %
    
    
    27.6
    %
    
    
    25.8
    %
    
    
    21.5
    %Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    16.3
    %
    
    
    19.0
    %
    
    
    17.6
    %
    
    
    18.7
    %Services
    
    
    41.8
    %
    
    
    46.3
    %
    
    
    45.2
    %
    
    
    50.4
    %Total cost of sales
    
    
    24.3
    %
    
    
    26.5
    %
    
    
    24.7
    %
    
    
    25.5
    %Gross profit:Products
    
    
    83.7
    %
    
    
    81.0
    %
    
    
    82.4
    %
    
    
    81.3
    %Services
    
    
    58.2
    %
    
    
    53.7
    %
    
    
    54.8
    %
    
    
    49.6
    %Total gross profit
    
    
    75.7
    %
    
    
    73.5
    %
    
    
    75.3
    %
    
    
    74.5
    %Operating expenses:Product development
    
    
    16.0
    %
    
    
    17.1
    %
    
    
    15.0
    %
    
    
    17.7
    %Selling and marketing
    
    
    31.8
    %
    
    
    34.3
    %
    
    
    31.8
    %
    
    
    34.0
    %General and administrative
    
    
    15.0
    %
    
    
    14.7
    %
    
    
    13.8
    %
    
    
    14.1
    %Total operating expenses
    
    
    62.8
    %
    
    
    66.1
    %
    
    
    60.6
    %
    
    
    65.8
    %Operating income
    
    
    12.9
    %
    
    
    7.4
    %
    
    
    14.7
    %
    
    
    8.7
    %Other, net
    
    
    1.0
    %
    
    
    1.1
    %
    
    
    0.8
    %
    
    
    1.1
    %Income before taxes
    
    
    13.9
    %
    
    
    8.5
    %
    
    
    15.5
    %
    
    
    9.8
    %Income taxes
    
    
    4.8
    %
    
    
    3.2
    %
    
    
    5.5
    %
    
    
    3.7
    %Net Income
    
    
    9.1
    %
    
    
    5.3
    %
    
    
    10.0
    %
    
    
    6.1
    %
 Three Months Ended September 30, 2008 and 2007
 Net Sales
 Cost of Sales
  - 8 -




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Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense.
 Nine Months Ended September 30, 2008 and 2007
 Net Sales
 Cost of Sales.
  - 9 -




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Product Development.
 Selling and Marketing.
 General and Administrative.
 Operating Income.
 Income Tax Expense.
 Liquidity and Capital Resources
    - 10 -




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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Operating Leases.
 Purchase Obligations.
 Tax Audit Settlements and Deposits
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years(In Thousands)Operating lease obligations
    
    $
    4,930
    
    
    $
    519
    
    
    $
    2,718
    
    
    $
    1,289
    
    
    $
    404Purchase obligations
    
    
    5,881
    
    
    
    5,881
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    10,811
    
    
    $
    6,400
    
    
    $
    2,718
    
    
    $
    1,289
    
    
    $
    404
  - 11 -




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Critical Accounting Policies and Estimates
  Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
    - 12 -




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Foreign Currency Exchange Rate Risk.
 
 Item 4. Controls and Procedures
    
 Part II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   - 13 -




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Total Number ofShares Purchased as
    
    
    Maximum Number ofTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    Shares that May YetShares
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Be Purchased UnderPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    the Plans or ProgramsJuly 1-31, 2008
    
    
    5,381
    
    
    $
    12.36
    
    
    
    5,381
    
    
    
    1,235,268August 1-31, 2008
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,235,268September 1-30, 2008
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,235,268Total
    
    
    5,381
    
    
    $
    12.36
    
    
    
    5,381
 
 Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    
    First Amendment to Credit Agreement dated as of November 5, 2008 by and between
Wells Fargo Bank, National Association and Registrant31.1
    
    
    Section 302 certification by Terrance D. Paul31.2
    
    
    Section 302 certification by Mary T. Minch32.1
    
    
    Section 906 certification by Terrance D. Paul32.2
    
    
    Section 906 certification by Mary T. Minch
  - 14 -




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SIGNATURES
  RENAISSANCE LEARNING, INC.
(Registrant)November 4, 2008
    /s/ Terrance D. PaulDate
    Terrance D. PaulChief Executive Officer and a Director

(Principal Executive Officer)November 4, 2008
    /s/ Mary T. MinchDate
    Mary T. MinchSenior Vice President-Finance, Chief Financial Officer and

  Secretary

(Principal Financial and Accounting Officer)




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Exhibit No.
    
    Description10.1
    
    
    First Amendment to Credit Agreement dated as of November 5, 2008 by and between Wells
Fargo Bank, National Association and Registrant31.1
    
    
    Section 302 certification by Terrance D. Paul31.2
    
    
    Section 302 certification by Mary T. Minch32.1
    
    
    Section 906 certification by Terrance D. Paul32.2
    
    
    Section 906 certification by Mary T. Minch